ASIC win raises bar for directors

Directors will have to pay special attention to company accounts after the Centro decision, former NSW Supreme Court judge Robert Austin said yesterday.

“It’s raising the bar. This is the first Australian case that focuses intensely on the relationship between the duty of care and the provisions of the Corporations Act about financial statements and financial reports," the Minter Ellison senior consultant told The Australian Financial Review TV.

“It weaves them together and it comes up with the proposition that the directors have a responsibility when they’re signing off on the financial statements . . . to be sufficiently familiar with the accounting standards, to know what a current and non-current liability is, to read the financial statements . . . and then they have to apply that knowledge to the financial statements and assess for themselves whether the financial statements are right and in accordance with the accounting standards."

It is not a case where the court is saying the directors have to get the accounts right. “This is really about fault, and the whole point of the judgment is saying these directors were at fault because this was such an obvious thing," Mr Austin said.

It didn’t require sophisticated understanding of accounting standards. The standard that clearly applied made it plain that the liabilities had been treated as non-current to the tune, in one case, of $1.5 billion and the other $580 million. In those cases they were clearly current liabilities and should not have been treated as non-current liabilities and the directors, knowing what they did, should have known that and should have stopped it.

“What it tells us is directors can’t just . . . rely on the executive staff and only where there is something obvious and egregious do they need to intervene.

“No, the directors can certainly rely on advisers . . . but when there is something that required the application of their commonsense and knowledge of the company, and their basic understanding of accounting standards, then they have to intervene," he said.

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Information overload was also no excuse. “In this case, not only were the board papers 450 pages long, but the production of the annual financial statements was described in evidence as a massive project: 65 documents with 93 sets of complex financials with an average of 50 pages each, which equated to over 3000 pages in total."

Mr Austin said Justice John Middleton’s decision notes the board can control the information it receives, and it can take more time.

“If something is in the board pack you have to be aware of it for all purposes. The fact you are looking at it in a directors’ meeting doesn’t entitle you to disregard it when something else comes up, namely the approval of the financial statements," Mr Austin said.

The principle is not confined to financial statements. “Directors have to apply an inquiring mind whenever they get reports in from an audit committee or even the auditor.

“They can’t just accept that they’ve done the job and we can rely on them. That’s a general principle and applies to other kinds of reports, too."